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The Apple Trading Game: How You Can Profit from the Pattern

With the introduction and newly-found popularity of weekly options over the past couple years, we have seen a distinct pattern in some of the high-beta trading names but especially on Apple (AAPL).

This is not exactly a huge trading secret, as we have seen some veiled references on some blogs on the pattern AAPL has been fairly consistently putting in over the past several weeks and months.

We have also heard several mentions on programs such as Fast Money regarding the huge sums traders have made on low-cost out of the money weekly AAPL options (but of course always after the fact, not before the trade).

As a service to investors, we wanted to point out what we think is really happening, the motivation behind it, and dispense some words of caution.

In a nutshell, AAPL has been showing a distinct pattern of trading on a weekly basis, dependent on the day of the week.

Clearly AAPL has been in an unbelievable uptrend, with higher highs and higher lows just about every week in recent memory (with this week being a very major exception).

But let’s get to some of the specifics of what we have noticed.

AAPL has been trading in a fairly tight range on Fridays of each week, relative to the rest of the week. This is largely attributed to the concept of “pinning”, which many traders think is some underhanded conspiracy to “pin an option strike”. In a way it is a “conspiracy” but more in the sense of institutional options writers who have sold vast amounts of puts and calls having to balance out their “book” with the buying and selling of stock.

Many also think that the “selection of the pin strike” is meant to cause the most traders to lose the most money. There is even a cottage industry of websites devoted to this proposition and which attempt to “pick the strike” at which some high-beta names will close on a Friday. Again, we think this is a misconception and that the action again is a “book-balancing” one, similar if you will to how a major Vegas sports book has to adjust a football betting line to get a 50/50 split on both sides of the bet.

AAPL has been closing on Fridays well off the highs of the week. Not always, but usually, over the past few months. We think this is a function of two things: hyperactive traders running the stock up mid-week and then taking some profits going into Friday and the action described in “pinning” above.

In general, AAPL has been running up around $20-30 during the course of the week from the prior Friday’s close, and then settling back in on Friday, with yet another week-ending high but lower than the mid-week highs.

We could document all this with a spreadsheet but you can just as easily look at some historical quotes on a daily basis to see the pattern. But here are a few summary statistics for the last 10 weeks:

AAPL put in new all-time highs in 8 of the past 10 weeks

The average move from a prior Friday’s close to a mid-week high was a positive gain of +$25

The average close on Fridays from a mid-week high was a negative move of -$12.

On Fridays AAPL has generally been trading in a range of about $7, well off its “normal” daily average true range around $13.

So, what are the trading implications of this? (In other words, how can you profit?)

We know some traders who are buying fairly far OTM (out of the money) calls on a Friday for the next weekly series and have been doing consistently well by selling them mid-week. The same would apply obviously to stock purchases.

We also know some traders who have tried to chase mid-week AAPL highs and have been burned mightily on expiring weekly options, although the stock purchases have generally worked out just fine in the long run, after a short period of “pain”.

Most importantly, when a pattern like this starts getting noticed, you can almost count on it coming to an end. But then again, AAPL has defied all logic for most stocks and one really cannot count on anything “normal” when it comes to trading the stock or the options.

If one is tempted to try this “pattern” in terms of a trade, we would advise doing so with very small positions and recognize that any weekly options play can go south very quickly. With AAPL earnings coming up fairly shortly and the constant news flow both good and bad surrounding AAPL, please recognize that these are high-risk trades.

But let’s finish with a comment on this week.

There were several negative news stories coming out regarding AAPL, the markets overall had a rough week, earnings season for AAPL is just around the corner, GOOG plunged Friday after earnings, and some analysts were piling on the hype with new $1,000 AAPL targets. So it was not exactly a normal week. (We also wonder if some money came out of AAPL this week to play GOOG).

However, it should still be noted that AAPL dropped on Friday -$39 off its mid-week high, well above the average loss for that timeframe and it was essentially the first Friday close in 10 weeks without a higher weekly close (one week was flat). Also, the trading range on 4/13 was close to $21, almost triple the “normal” Friday range.

Cause for concern? Wish we knew. But we did buy our usual low-cost far OTM AAPL options which expire next Friday, so we will soon find out in the most real way possible. But, hey, it works until it doesn’t and the trade owes us nothing at this point.

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